The Korean Journal of Financial Studies (재무관리논총)
- Volume 10 Issue 1
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- Pages.249-269
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- 2004
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- 1226-1467(pISSN)
Free Cash Flow, Agency Conflicts, and Compensation Plans in a Non-growing Industry
Abstract
Free cash flow is known as a typical type of agency conflict between managers and shareholders in a firm. The insurance industry, which is not growing, is particularly susceptible to such excessive cash flow. We herein investigate the effects of stock ownership plans on reducing agency conflicts. We adopt undistributed cash flow to proxy free cash flow, and size, default risk, group membership, leverage, investment opportunity, and stock options are selected as explanatory variables. We find that stock option plans are effective(at a 10% level) in reducing free cash flow.